Cash Trust Investments – Are They For You?

There are three variables that all investors have to keep in mind. Security, Liquidity and Rate of Return. Cash trust investments are a good mix of the first two variables, while scoring fairly low in the last one. Still, they have their place in any investor’s balanced portfolio.

A cash trust investment is an investment product that pools the assets of several small investors and shops them around to banks, buying Certificates of Deposits (CDs) at advantageous interest rates. Because of the large sums invested, banks are willing to give a better investment rate for them. Most of these CDs are bought as ladders – the money is divided into 12 parts and CDs are bought sequentially. By spreading the investments out over several banks, with all deposits kept at $98,000 each. As the Federal Deposit Insurance Corporation (FDIC) insures individual deposits of up to $100,000 in the United States, this retains insurance on your investment and makes the investment more secure.

Because of the aggregated nature of a cash trust investment, its liquidity is generally better than buying individual CDs as a private investor. The well managed cash trust fund maintains around 15 to 20% of its assets in liquid form, making it possible for them to help an investor who needs to liquidate his holdings to meet a near term financial emergency. On top of that, most of these investments have somewhere close to 10% of their assets (bought as Certificates of Deposit) maturing every calendar month. This compares well to the lack of liquidity in fixed investments and bonds and bond funds.

From the perspective of a small investor, Cash Trust investments are low-yield and fairly safe products. They often turn on regularized payouts, much like buying an annuity for a structured settlement. If you’re going to do a cash trust investment, treat it as your middle term reserve fund. It’s going to be a stable vehicle for your finances, but it’s not going to grow your asset base that much. Using the traditional retirement mix of packages, a cash trust investment is a good resource to do in the last 5 or 7 years before retirement and should be gradually phased out in favor of a bond fund after retirement. Many, but not all cash trust investments request that you pay a regular amount in each month, on top of an initial $2,000 investment.

The best benefit of a cash trust fund is its low overhead. Because there’s little risk in it and there’s little pressure to “pick the hottest stocks”, there’s strong price competition among vendors – the setup fees are fairly low and the transaction fees taken from payments to you are also small and often times waived. This compares well with the transaction fees on mutual and hedge funds and the broker percentages taken from payouts.

Copyright 2007 Jim Sterling - All Rights Reserved

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